Question

Ataxia Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 10 years with no salvage value at the end of the 10 years. Ataxia's internal rate of return on this equipment is 8%. Ataxia's discount rate is also 8%. The payback period on this equipment is closest to (Ignore income taxes.):

Answer 1

6.71 years

Step-by-step explanation:

we need to determine the PVIFA for 8% and 10 periods:

PVIFA = [1 - 1/(1 + i)n ] / i

PVIFA = [1 - 1/(1 + 0.08)¹⁰ ] / 0.08 = 0.5368 / 0.08 = 6.71

Ataxia's payback period should be 6.71 years or less in order for this project to be feasible and accepted.